Korean funds cut 2017 return targets; keen on infrastructure, mezzanine debt: report

The Korean Teachers’ Credit Union (KTCU), the Military Mutual Aid Association (MMAA) and three other major South Korean savings funds have trimmed their investment return targets to the 4% level for next year, while looking to further increase overseas and alternative investments, according to a media report on Dec. 6.

By asset class, the five associations, including the funds for public officials, scientists and police officers, plan to boost allocations to infrastructure and mezzanine debts, which are seen less vulnerable to economic cycles and produce relatively steady incomes, said online news outlet edaily, referring to 2017 business plans of the five funds: KTCU, MMAA, the Public Officials Benefit Association (POBA), the Korea Scientists and Engineers Mutual-aid Association and the Police Mutual Aid Association.

KTCU sees its 2017 investment return dipping to 4.32%, compared with this year’s target of about 5%. Its 2015 investment return of 5.0% was the highest among key South Korean savings funds. To bolster returns, it will raise the volume of alternative investments by 2.7 trillion won ($2.3 billion) next year from 2016’s level. KTCU will expand the share of overseas assets by 3.3% points next year, while slashing that of domestic assets by the same margin. (For details on other funds, see Table below)

2017 Investment Plans for 5 Korean Savings Funds

	Total assets (projected)	Amount of alternative investment increase	2017 target return	2016 target return	2015 return
Korean Teachers’ Credit Union*	31 trillion won	2.7 trillion won	4.32%	About 5%	5.0%
Public Officials Benefit Association**	10.3 trillion won	690.3 billion won	4.20%	About 5%	4.3%
Military Mutual Aid Association	10.4 trillion won	244.8 billion won	4%	About 5%	1.4%
Korea Scientists and Engineers Mutual-aid Association	5.1 trillion won	671.7 billion won	4.50%	4.84%	4.6% (prelim)
Police Mutual Aid Association	2.7 trillion won	50.25 billion won	4.70%	5.7%	3.7%
Source: edaily and other Korean media reports Note: * KTCU reportedly posted a 4.8% investment return for 1st half of 2016. ** POBA said in February 2016 that it aimed for a 5.5% annual investment return by 2020.

 

The five associations will lower the proportion of conventional assets such as bonds and stocks in 2017 amid caution over a U.S. rate raise as early as this month.

But they expect infrastructure will benefit from President-elect Donald Trump’s campaign pledges to lift spending on infrastructure and South Korea’s new regulations aimed at promoting renewable energy. Rigid banking regulations will likely create more room for private debt funds in M&A funding and corporate refinancing markets.

The Police Mutual Aid Association will increase the share of alternative investments, both at home and abroad, by 4.7% points from this year’s level, whereas slashing the proportion of bonds by 4.5% points.

In comparison, POBA will boost the proportion of offshore alternatives by 3.7% points next year, while cutting that of onshore alternatives by 4% points. The fund for public officials plans to raise the share of overseas investments by 5% points to 44.3% by end-2017, while reducing that of domestic portfolios by the same margin.

Both MMAA and the scientists’ fund will lift the share of alternatives by 1% point each: no breakdowns between onshore and offshore alternatives are available for the two funds.

MMAA, with 10 trillion won in assets under management, will put focus on diversifying investment asset types, and continue to invest in aircraft and private debt funds which it initiated this year. “Once the U.S. raises interest rates, PDF will likely produce higher investment returns” edaily quoted Sang-ho Lee, the CIO of MMAA, as saying in an interview. “We will execute overseas investments by sector.”

The scientists fund, with a projected 5.1 trillion won in assets next year, will more than double its infrastructure assets to as much as 480 billion won ($ 410 million) by end-2017, from 229 billion won at end-September 2016, Yonhap Infomax reported, citing unnamed financial industry sources on Dec. 5. By contrast, it will reduce investment in real estate and corporate financing.